Aussie coal bailout begins with fair share of pain - Reuters

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The Liddell coal-fired power station is pictured in the Hunter Valley, north of Sydney, Australia, April 9, 2017. Picture taken April 9, 2017.

MELBOURNE, Aug 13 (Reuters Breakingviews) - Australia has long defended its dependence on coal. The fossil fuel provides up to 70% of its power needs and is the country’s second-biggest export. So it’s progress when an establishment figure calls for a concerted effort to wean Down Under off the carbon-spewing black stuff. Trouble is, it’s coming from Graeme Hunt, chief executive of beleaguered, coal-dependent AGL Energy (AGL.AX), whose words could easily be read as a veiled pitch for a taxpayer bailout.

Hunt’s basic message makes sense. Moving Australia off coal and reducing greenhouse-gas emissions will require coordination between multiple stakeholders to ensure there’s enough renewable power to replace it. Employees and the regional economies that rely on the industry need to develop new sources of income, and then there has to be sufficient cash left over to clean up once the mines and power plants close.

The Australian state of Victoria in March struck a deal with EnergyAustralia to close the country’s dirtiest coal-fired power station, and structured the transaction to limit the cost borne by the public. Given the urgent need to slash emissions, there is a case for using public funds as well. Government aid, however, should come with a price, especially for a company like AGL which spent much of the past decade digging itself into a financial hole.

Poor decisions on wind contracts a decade or more ago ended up causing much of its almost A$3 billion ($2.2 billion) in post-tax write-downs in February. It also bought more coal assets, which have performed poorly of late as wholesale energy prices dropped. After the company expressed the intention to demerge its power stations from its retail operations in March, its then-CEO quit, and shares have plunged 30% since. When management projected in Thursday’s earnings release that this fiscal year’s net profit could drop by up to 60%, the stock touched a 17-year low to trade at a 19% discount to net asset value.

AGL shareholders and executives alike ought to share the bulk of the burden of any government rescue. For the former, that means accepting a big dilution and giving the government a decent equity stake in AGL’s renewables and retail operations. For the latter, it means a hefty pay cut. First the pain, then the gain.

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CONTEXT NEWS

- Graeme Hunt, the chief executive of Australia’s largest power producer AGL Energy, on Aug. 12 said that the country needs “a framework that allows the right decisions to be made by multiple players…[for] some form of orderly transition” away from coal-fired power stations. It would involve government, the private sector, regulators and shareholders, he said in comments to the Australian Financial Review.

- Hunt made the comments on the same day that AGL warned its profit for the financial year for the 12 months to the end of June 2022 could fall by up to 60% from its previous financial year. Underlying profit for the year to the end of June 2021 was A$537 million ($395 million), a 34% drop on the 2020 financial year, the company revealed on Aug. 12. On a statutory basis excluding almost A$3 billion in write-downs announced in February, AGL posted an annual loss of A$2. 1 billion.

- AGL is in the process of breaking the company in two. AGL Australia would house its retail energy and telecoms business as well as its gas-, hydro- and solar-power stations, gas storage, batteries and some wind farms. Accel Energy would house its coal-fired power stations as well as gas projects and storage, plus some wind farms and batteries.

Editing by Pete Sweeney and Sharon Lam

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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